FDA Reform Can Lift U.S. Economy

By Tomas J. Philipson and Andrew von Eschenbach -
Feb 28, 2013

Without a growing economy that
creates more high-paying jobs, both President Barack Obama and
congressional Republicans face the unpalatable prospect of much
higher taxes or reductions to popular programs (or both). Growth
is the best way to cut this Gordian knot.

One place to start is by lowering unnecessary barriers
facing innovative U.S. companies that are trying to bring new
products to market, particularly in the biopharmaceutical
sector. Less sensitive to the business cycle, with jobs that pay
about double the average private-sector salary, biopharma is a
leading U.S. exporter.

Both Democrats and Republicans know that excessive
regulation is slowing innovation in the industry. Shortly before
the 2012 election, the President’s Council of Advisors on
Science and Technology released a report, which received
bipartisan praise, asserting “broad agreement that our current
clinical trials system is inefficient.”

One inefficiency the report identifies is outdated
regulation. The inability of the Food and Drug Administration to
keep pace with changes in medical science threatens both
economic prosperity and public health. The drug-approval process
is glacial: It takes about 12 years and $1.2 billion to develop
a single new drug that is approved by the FDA.

The council’s report establishes an ambitious, yet
reachable, national goal: doubling the current annual output of
new medicines for patients. We believe existing evidence
suggests this goal can be met by altering the FDA’s onerous
clinical-trial requirements.

Clinical Trials

The FDA regulates the quality and safety of medical
products, only granting marketing approval after increasingly
laborious, expensive, three-phase clinical trials. Phase 1
trials involve a few dozen patients and focus on safety; Phase 2
trials are larger and look for evidence on optimal dosage and
effectiveness; Phase 3 trials are focused exclusively on
effectiveness.

Clinical trials account for a large share of industry
research and development costs, with Phase 3 trials accounting
for about 25 percent and requiring (on average) three years for
completion. Manufacturers that are obliged to satisfy
shareholders and stay financially viable may choose not to take
promising products into the prolonged Phase 3 process, often
called “the valley of death.”

For medicines that make it to market, the long process
delays sales and shortens effective patent life, severely
damping the industry’s incentive to invest in new treatments.

These Phase 3 clinical trials served us well in the past.
Today, in an era of precision or personalized-drug development,
when medicines increasingly work for very specific patient
groups, the system may be causing more harm than good for
several reasons.

First, because of their restrictive design and the way the
FDA interprets their results, Phase 3 trials often fail to
recognize the unique benefits that medicines can offer to
smaller groups of patients than those required in trials.

Second, information technologies have created improvements
in our ability to monitor and improve product performance and
safety after medicines are approved for sale. Post-market
surveillance can and should reduce dependence on pre-market drug
screening in Phase 3 trials.

Third, reducing reliance on Phase 3 trials is unlikely to
introduce an offsetting harm induced by more dangerous drugs,
since evidence supporting safety is produced in earlier phases.
Manufacturers also have powerful incentives to maintain drug
safety, since they take enormous financial hits -- well beyond
the loss of sales -- when drugs are withdrawn after approval.

Global Pressure

Finally, enormous global pressures for cost control have
insurers demanding real-world evidence about product quality and
effectiveness. For example, under the cost-sharing agreements in
effect in many European countries, payers reimburse drug
companies only if patients respond to therapy. Such arrangements
provide an alternative to Phase 3 effectiveness trials after
safety and baseline efficacy have been established in earlier
phases.

Reducing Phase 3 requirements would be particularly
effective for some chronic diseases such as obesity, where
options are often few, and the FDA typically requires large
Phase 3 trials to catch rare side effects (which patients often
are willing to endure anyway). Before July 2012, the FDA hadn’t
approved any new obesity drugs in 13 years, after serious heart-
valve problems with an earlier approved drug, Fen-Phen, led the
agency to pull the drug in 1997. Afterward, the agency remained
extremely wary of new obesity medicines.

One new drug approved by the agency, Qsymia, is a
combination of two older generic drugs. Still, the FDA required
the drug’s maker, Vivus Inc. (VVUS), to conduct large Phase 3 clinical
trials and agree to 10 post-marketing requirements, including a
long-term study on heart safety.

Under our proposed system, the drug could have come to
market after promising early-stage research in targeted
patients, with appropriate post-marketing studies required.
Payers and patients would be the ultimate judge about the
quality of the product, and companies could learn from the
experience to develop superior products if needed.

Companies would still be liable for unforeseen side
effects, but patients and doctors would be warned -- through the
drug’s labeling -- that the product had been approved based on
promising but provisional research.

Gradually replacing or reducing dependence on Phase 3
trials with smaller, faster adaptive trials and post-market
surveillance would have a positive impact on medical innovation
and the U.S. economy -- and meet the council’s goal of doubling
medical innovation.

Faster Approvals

Here’s how: consider that the profit margins for innovative
drug development are about 10 percent greater than their costs.
Based on data from the widely cited Tufts Center for the Study
of Drug Development, doing away with Phase 3 trials would reduce
development costs by 25 percent. Doing the arithmetic, if the
profit margin was 10 percent before, lowering costs by 25
percent increases the profit margin to 47 percent above costs.

In the absence of Phase 3 trials, revenue would start
coming in about three years earlier. This raises the present
value of revenue by about an additional 10 percent, boosting
returns further -- to about 60 percent more than development
costs.

A study by the economist Daron Acemoglu of the
Massachusetts Institute of Technology and other research suggest
that a 1 percent increase in innovative returns would raise the
number of new products introduced by at least 4 percent.
Boosting returns to 60 percent, then, implies a 240 percent gain
in new products. Even if we assume a much more conservative
effect -- say, less than half of that -- the increase in new
products would be 100 percent, doubling medical innovation.

The benefits to patients and the economy from this
innovative surge would probably be enormous. The U.S.
biopharmaceutical industry makes up about 2 percent of the
national economy.

Existing evidence, gathered across diverse drug classes
that treat HIV, cancer and cardiovascular disease, suggests that
the gain to patients beyond the sales of treatments (what
economists call “consumer surplus”) ranges from five to nine
times the sales. That is, patients gain more in health and
longevity than they pay for their treatments.

Thus, the value to patients from doubling an industry that
is 2 percent of gross domestic product would range from 10
percent to 18 percent of GDP.

Examining peer-reviewed research on how costs and profits
affect innovation, as we have done, suggests very large patient
benefits from reducing the burden of Phase 3 requirements.
Doubling innovation, to reach the presidential council’s goal
and adding value on par with a tenth of GDP, is thus entirely
feasible. It would promote economic growth and pay huge
dividends in better health for millions of patients. What’s
needed is the courage in the White House and Congress to make
the necessary changes.

(Tomas J. Philipson is the Daniel Levin Chair of Public
Policy Studies at the University of Chicago. He is also a co-
founder of Precision Health Economics LLC, which consults for
payers, governments and manufacturers. Andrew von Eschenbach,
president of Samaritan Health Initiatives, a consulting
practice, was commissioner of the Food and Drug Administration
from 2006 to 2009. Both are members of Project FDA at the
Manhattan Institute. The opinions expressed are their own.)

To contact the writers of this article:
Tomas J. Philipson at t-philipson@uchicago.edu
Andrew von Eschenbach at Drvone@samaritanhealth.net